Determining the correct customs value for imported products is one of the most technically challenging aspects of managing customs compliance. However, as it often directly impacts revenue collection for the authorities, it is very important to get it right, and to be able to support any customs value declared. Incorrect or unsupportable customs values can lead to overpayment of import taxes that cannot be claimed back. Underpayment of import taxes that are assessed retrospectively trigger, potentially significant, penalties and waste management time dealing with queries and challenges.
Conversely, correct and supportable custom value declarations will have a positive impact on business, reducing costs and increasing efficiencies.
The 1994 GATT agreement on valuation for customs purposes sets out many core principles on ways to determine the appropriate customs value for imported products, based on arm’s length pricing and the concept of the “price paid or payable” for imported goods. Most countries have officially implemented a national version of this agreement or abide by its principles. Although the intentions and ambitions of the agreement were clear, in practice many details are not or only vaguely addressed. This has resulted in widely varying interpretations and implementation in different countries, particularly in relation to customs valuation if the seller and buyer of a product are related companies.
In addition, although the concept of arm’s length pricing may be the same, the application of it for customs valuation purposes is significantly different to that for transfer pricing purposes. However, the latter is both better understood and takes priority within many multinational companies.
All of the above leads to the following typical challenges when managing customs valuation
- managing price changes, especially if they are reductions, sudden, and/or significant;
- dealing with retrospective transfer pricing adjustments;
- determining how to treat payments such as royalties, license fees, management fees etc. for customs valuation purposes;
- customs valuation treatment of incidental importations (e.g. software, hand carried products).
Customs around the region have become both better trained and more aggressive in challenging declared customs values, particularly for related party trade. They are aware that in many cases companies may have no substantial support for customs value declarations other than transfer pricing support, which is often inadequate for this purpose. Therefore, proactive and specific management and support of customs values is a must for any importer to safeguard against non-compliance and liabilities.
More positively, such a proactive approach to customs valuation may result in duty savings through opportunities to unbundle non-dutiable elements from an import price. In addition, many authorities offer the option to obtain customs valuation rulings, which can provide more certainty of compliance as well as savings.
How can WMS help?
WMS has both a broad and deep understanding of customs value laws and its interpretations. Last calendar year alone, our team was involved in over 200 customs valuation disputes. Many of our staff are ex-officials that provide additional insight into the authorities’ views and concerns relating to customs valuation. Our typical work covers the following:
- Critical assessment of the accuracy and supportability of declared customs values; this includes both the arm’s length nature of related party pricing and any separate payments made by the importer.
- Reducing duty costs through unbundling non-dutiable components from import prices;
- Assistance in managing customs valuation challenges and audits;
- Voluntary disclosure of customs valuation non-compliance, such as accidentally erroneous declarations, non-inclusion of assists, transfer pricing adjustments, etc;
- Provide training to staff on customs valuation issues and risks to create awareness to limit the opportunity for non-compliance.
Reducing an assessment of back-duties and penalties on royalties
A manufacturer of automotive parts was audited by the Post-Clearance Audit Bureau (PCAB) of Customs and was challenged on the dutiability of the royalty fees paid under a License and Technical Assistance Agreement.
How we helped
WMS conducted an analysis of the License and Technical Assistance Agreement to assess the dutiability of the royalty fees from a customs valuation perspective and provided strategies to mitigate risks resulting from historic as well as future shipments.
- A technical assessment on the dutiability of the royalty fees;
- Addressing the transactions of the concerned imported goods as well as strategies for future shipments; and
- Provision of strategies and technical information and regulations to support the negotiation process with PCAB to reduce the duty and tax exposure.
Benefit for the client
Significant reduction of the duty and tax exposure from approximately US$ 2.7M to US$ 467,000.
Assistance on a voluntarily disclosure of non-compliance issues to Thai Customs for a leading trading company in Thailand
A company approached us as it was concerned about possible non-compliance with various customs laws and regulations, and the potential for back-duties, penalties and supply chain disruptions.
How we helped
WMS provided support to minimise the duty and tax exposure as a result of non-compliance issues related to the use of duty privileges for imported automotive parts. Our work included:
- Analysis on the potential risks and exposures for historic and future ongoing shipments;
- Provision of technical information and precedent rulings to support the company’s position;
- Provision of a report on available self-disclosure possibilities, including pros and cons and potential penalties under each scenario, and recommendations on strategies and steps to mitigate the customs risks and exposures; and
- Preparing the company for the voluntary disclosure and provision of ongoing assistance throughout the voluntary disclosure process.
Benefit for the client
- Significant mitigation of duty and tax exposure for approximately 550 million THB (18.3 million USD).
- Improved compliance level for the company in relation to using duty privileges for future shipments.